Goldman Big Knifes Firm on Exit

This is something: a top Goldman Sachs executive very publicly quits today, announcing in a New York Times op-ed that the top investment bank is no longer a place he’s proud to work. Why? Excerpt:

How did we get here? The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.

What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.

More:

It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.

I consider myself relatively (not highly, but moderately) savvy, financially. I have an MBA from a top-25 business school, with my focus being in portfolio management. I attended a major university on an elite full academic scholarship.

I say none of those things to brag. I say them to underscore this point: I DO NOT TRUST MYSELF TO INVEST IN THIS KIND OF MARKET. And, if someone of moderately high intelligence and with an excellent academic background in a related field can’t feel confident investing in this kind of market, then almost no one should feel confident about it. And by no means should you trust a firm like GS to do it for you, particularly if they are recommending exotic products at high margins.

Me? I invest in a portfolio of ETFs that are designed to follow major market indices, at relatively low expense ratios, and simply periodically re-balance that portfolio. I have no illusions of being smart enough to do any more than that. I don’t time the market, and I don’t guess at picking stocks or even sectors. I just allocate money to manage risk and taxes and let that be enough to generate sufficient returns. Anything else is a fool’s errand.

This isn’t surprising to anyone that has worked as an institutional investor. I dealt with Goldman traders daily. Not dealing with Goldman really isn’t an option. If they are active in a name you are trading, you can’t pass up liquidity and pricing because you don’t like Goldman. At the end of the day, you have to deliver best execution for your clients and if Goldman is the shop that day, so be it. If Goldman is the lead bookrunner on an IPO you want to own, they get the say in how the shares are allocated. Again, you will be disadvantaging your clients by not dealing with Goldman. It’s a catch 22 and Goldman uses it to their advantage. It is true that a lot of so called sophisticated investors are in fact not so. These guys are easy pickings and their clients suffer for their lack of due diligence. I’ve seen a lot of money flushed down the toilet by portfolio managers buying things they don’t fully understand.

If the FED’s next dose of QE lines up closely with Facebook’s IPO then you have to ask yourself, just what is it the insiders paying to use Google analytics (ie data mining the Hive) know that we don’t … and how global finance has become a type of ‘plantation’ and we’re the serfs…

Clare, I’m not posting a lot of what you’re submitting this morning because I can’t make any sense of it. I’m not trying to be a pill, but I want things posted here to advance the discussion, and I literally don’t understand what you’re saying.

The finance culture is skewed to equity holders because ROE not ROA is the metric for remuneration, see this critique of the UK’s central bank The Bank of England take on the crisis at the end of last year:“[Andrew Haldane] takes the fact that the value of an option is enhanced by an increase in the volatility of whatever underlies it and applies that directly to the much broader canvas of bank behaviour. “Because volatility increases the upside return without affecting the downside risk”, banks will naturally “seek bigger and riskier bets” to “maximise shareholder value”. There’s much truth in this, but I think there’s also a fundamental error. After all, the option represented by bank equity vanishes if a bank fails.“http://www.cobdencentre.org/2011/11/control-rights-and-wrongs/

Using ROA [see Apple market cap example above] not ROE would put the moral hazard back where it belongs: in the proprietors’ pockets (and their employee-managers’ options) not their clients…

“I say none of those things to brag. I say them to underscore this point: I DO NOT TRUST MYSELF TO INVEST IN THIS KIND OF MARKET. And, if someone of moderately high intelligence and with an excellent academic background in a related field can’t feel confident investing in this kind of market, then almost no one should feel confident about it. And by no means should you trust a firm like GS to do it for you, particularly if they are recommending exotic products at high margins.”

My brother, who is the CFO and Treasurer of a Fortune 500 company, says the exact same thing. He deals with investment bankers and analysts on a regular basis and doesn’t trust them as far as he can throw them. Before he got his MBA, he was a trial lawyer at the Justice Department and can spot BS a mile away.

Did you read the Michael Lewis article in Portfolio about the investment firm whose mantra is “no one can beat the market?” They see their job as, at least in part, keeping their clients from doing something stupid.

sorry Rod,
IMHO logic, math morals and legitimacy are metaphysical in nature. Can I accomodate a lack of familiarity in Western humanism with this Eastern apophatic approach?

We can’t know the value of the money in our wallets (pension funds) because the FED controls the value of the money in our wallet (and pension funds) and the value of the reserves on the bank balance sheets of most of the (pension funds) of the rest of the world. The government is the new religion and the FED is its deity.

“…and how global finance has become a type of ‘plantation’ and we’re the serfs…”

The largest problem in the global economy today is that the financial services sector is oversized relative to the total economy, that is that more is being skimmed off the top of every economy than ever before.

We will indeed become the serfs to fund managers and über-investors, and democracy will become a mirage unless some action is taken to return the sector to its proper size.

It is as if the mafia is running the global economy, and it’s not surprising that the managing directors of investment firms around the world think and talk like organized crime figures. (referencing Rod’s item about Goldman Sachs)

The operative phrase in this guy’s self-dramatizing bye-bye letter is “morally bankrupt”.

Goldman is indeed morally bankrupt. In the great bailouts of 2008-9, politicians who accepted contributions from this morally bankrupt firm forced American taxpayers to sustain it in its morally bankrupt state .

Employment with Goldman should be considered prima facie evidence of unfitness for political office.

I doubted this concept when I was in B-School, because there are obviously some fund managers who do, in fact, beat the market quite consistently. My professor gave me a thought experiment to demonstrate the point.

Imagine a football field full of people in business suits, each of them with a quarter in his pocket. Have them each flip that quarter in the air. Those that got heads have to leave the field. Those that get tails get a bonus, a raise, and get to stay on the field. Have the remaining empty suits repeat that process. After 10 times, some of them still will not have not flipped a head. After those 10 times, the remaining men in business suits will be called “Coin Flipping Experts” and will be given enormous sums of money, because it is assumed that they will be prepared to help someone bet an enormous money on tails and have a high probability of winning. This is the universe of fund management super-stars.

It’s not devastating because it’s not terribly surprising. Average Americans already assume that these sorts of things are going on all over Wall Street. Just as we all have come to expect greed, gridlock, and grandstanding on the part of our politicians. For heaven’s sake, it’s why there’s people out protesting in the streets in ways they haven’t been since the 60s. Some are waving yellow, “Don’t Tread on Me” flags, some are waving signs that say, “We are the 99%.” While there are naturally major disagreements between them, both protest movements have a point, and both movements originate in the general frustration with the Powers that Be.